Jeffrey W. Allen (Cox School of Business, Southern Methodist University,) John J. McConnell (Krannert School of Management, Purdue University)
Abstract
This study proposes a managerial discretion hypothesis of equity carve-outs in which managers value control over assets and are reluctant to carve out subsidiaries. Thus, managers undertake carve-outs only when the firm is capital constrained. Consistent with this hypothesis, firms that carve out subsidiaries exhibit poor operating performance and high leverage prior to carve-outs. Also consistent with this hypothesis, in carve-outs wherein funds raised are used to pay down debt, the average excess stock return of + 6.63 percent is significantly greater than the average excess stock return of - 0.01 percent for carve-outs wherein funds are retained for investment purposes. Copyright The American Finance Association 1998.
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